Kerry plays referee in research funds dispute

Saturday

Aug 23, 2008 at 12:01 AMAug 23, 2008 at 8:20 PM

When Sen. John Kerry landed his gig as chairman of the Small Business and Entrepreneurship committee nearly two years ago, he seemingly found a post that could avoid public controversy. However, controversy eventually has a way of catching up with just about every legislative committee.

Jon Chesto

When Sen. John Kerry landed his gig as chairman of the Small Business and Entrepreneurship committee nearly two years ago, he seemingly found a post that could avoid public controversy.

After all, who doesn't want to help the little guy?

However, controversy eventually has a way of catching up with just about every legislative committee. In Kerry's case, he recently tried to broker a compromise between two small-business constituencies - those with major venture-capital funding and those without it - in a high-stakes battle over federal research funds.

The fight over the future of the Small Business Innovation Research program is being closely followed here in Massachusetts, which is the second largest recipient of SBIR funds after California.

According to Kerry's office, Massachusetts small businesses received $241 million from the $2.1 billion program in 2006.

The federal definition of a small business is fairly expansive, allowing any company with up to 500 employees under the tent. But there's a big debate over a rule that keeps out companies that are majority-owned by venture capital firms if those VC backers control other companies that together employ more than the limit.

This rule hasn't gone over well with the venture capital and biotech industries, who saw a major victory earlier this year when the House overwhelmingly voted to let the VC-backed firms into the party.

That House bill set off alarms among a wide range of small-business advocacy groups, who urged Kerry to protect their revenue source. Kerry eventually brokered a compromise with Sen. Kit Bond of Missouri, who had been pushing to help the VC firms on the Senate side, after months of discussions. That plan was approved by Kerry's committee on July 30, and Kerry hopes to bring it to the Senate floor for a vote next month.

The compromise would allow the VC-controlled companies up to 18 percent of SBIR health research grants and up to 8 percent of the rest of the SBIR pie. It would also increase the size of that pie by gradually raising the portion of federal funds set aside for SBIR money over 10 years.

Neither side seems happy about the deal, but both sides seem like they could live with it. Certainly, the small-business types like Kerry's plan better than the House bill, and the biotech and VC firms see Kerry's acceptance that some SBIR money should head their way as a major step forward.

On one side are folks like John Butler, chief scientist and a principal at Image Acoustics Inc. in Cohasset. Butler says the SBIR funds account for as much as 70 to 80 percent of the budget for his five-person firm, which designs underwater sound transducers for the Navy.

Butler says he's worried that allowing firms with major VC backing into the mix will leave less money for smaller firms like his. He also says the program's primary focus could end up being shifted away from innovative research and early-stage product development.

The Smaller Business Association of New England argues that it's unfair to let the venture-backed companies compete for SBIR funds with companies like Image Acoustics, partly because the move could crowd out entrepreneurs with good ideas who don't want to sell control of their companies.

But many biotech firms in the state are eager for a change. Stephen Mulloney, director of policy and public affairs for the Massachusetts Biotechnology Council, says most of his group's companies are majority-owned by one or several VC firms and can't participate in the SBIR program despite the fact that many of them are also small businesses.

While VC managers call some of the shots at these firms, Mulloney says their operations are still largely autonomous.

Mulloney says his group, which also has some members that receive SBIR funds, doesn't think Kerry turned a deaf ear to its needs despite his initial reluctance to give VC-controlled firms access to SBIR money. The compromise plan, Mulloney says, shows Kerry is listening.

Kerry points out that the fact that no one is completely pleased with the Senate committee plan is a sign of a good compromise. He says the plan still keeps a level playing field where all kinds of small businesses can compete.

There is some urgency to the debate, as SBIR funding is scheduled to expire at the end of September. However, one likely outcome would be that the current system is maintained so the debate can continue into next year. That would be a big victory for the small-business advocacy groups, but you can bet the VC guys and their biotech allies won't go away now that they've come this close to changing the formula.

Through it all, Kerry's committee most likely will remain under the radar and avoid the kind of bipartisan battles that generate streams of headlines among the more high-profile committees.

But there's one thing Kerry knows for sure: When you're deciding how to dole out millions in federal dollars, you're never going to make everyone happy.

Jon Chesto is the business editor of The Patriot Ledger. He may be reached at jchesto@ledger.com.

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